A bankrupt Arizona mortgage lender paid $856,000 in bonuses, marketing fees and "non competition" fees to mortgage brokers, builders and real estate brokerages that referred nearly $1 billion in business to the company, according to two audit reports by the Department of Housing and Urban Development.

HUD said the lender, First Magnus Financial Corp., violated anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA) because payments made under the auspices of marketing agreements with real estate brokers and builders were tied to the number of loans they generated for the company. A First Magnus quality incentive program for mortgage brokers also violated RESPA because payments were linked to the volume of loans generated, HUD said.

According to an Aug. 4 audit report, from 2003 to 2005 First Magnus’ Tucson, Ariz., corporate office paid more than $753,000 in marketing fees and "non-competition fees" to builders and real estate companies for referrals that generated $937 million in federally related mortgages, including 236 FHA insured mortgages totaling more than $30 million. The companies included builders TJ Bednar Homes and Santa Anna Homes, and brokerages Long Realty Co. and Realty Executives, HUD said.

In a statement, Realty Executives Southern Arizona said the company reviews all agreements with settlement services providers to make sure they comply with the law. Agents and consumers are made aware "of all of our corporate relationships through our affiliated business disclosure," which encourages consumers to shop around for settlement services, the statement said.

Realty Executives said the company’s agents "work with a wide variety of lenders" and that "the borrower is the ultimate decision maker when it comes to choosing their lender." The company said it was unaware of the HUD audit report “until we read about it in the paper."

First Magnus had a $9,999-a-month marketing agreement with builder Santa Anna Homes, HUD alleged, that was reduced to $5,600 for three months because of a slowdown in referral volume.

The lender allegedly paid $126,667 to Long Realty in the second half of 2003 under the terms of a marketing agreement that was also tied to referrals, HUD said. First Magnus disbursed $150,000 in "non-compete fees" to Long Realty’s parent company, Home Services of America, as part of an agreement that called for an "exclusive relationship" between First Magnus and Long Realty in Pima, Cochise and Santa Cruz counties, HUD said.

"As a result of theses competition-limiting agreements, uninformed borrowers were directed to First Magnus when better FHA mortgage terms may have been available from other lenders," HUD said in its audit. "This practice is a violation of RESPA’s prohibition of referral fees in exchange for FHA mortgage business."

A previous audit report published July 14 alleged that during the same time frame, First Magnus issued $102,840 in bonuses to mortgage brokers for originating and processing 326 federally related loans totaling more than $48 million. Of the payments to brokers, $58,571 were paid to seven brokers for originating and processing 169 FHA-insured mortgages totaling more than $24 million.

"First Magnus’s practice exposed HUD’s insurance fund to unnecessary risk due to brokers’ originating and processing FHA mortgages based on volume, without ensuring due diligence that the home buyers received a mortgage that was appropriate for their needs," the HUD audit claimed. "Accordingly, HUD should require that all current and future practices of issuing incentive payments to brokers for originating and processing FHA mortgages be discontinued."

Former First Magnus executive Karl Young did not respond to a request for comment from Inman News. Young is the president of StoneWater Mortgage, a new company that has taken up residence in First Magnus’ former offices in Tucson. Officials at Long Realty Co., and TJ Bednar did not return calls. Inman News was unable to reach Santa Anna Homes for comment.

Young told the Arizona Daily Star in stories published Aug. 9 and July 24 that he believed First Magnus’ relationships builders, real estate companies, and mortgage brokers complied with RESPA.

First Magnus closed its doors last year (see story). According to HUD auditors, the company had 13 branch offices and sponsored 1,961 FHA-approved loan correspondents.

The Arizona Department of Financial Institutions suspended the company’s license on Aug. 16, 2007, and First Magnus filed for Chapter 11 bankruptcy protection five days later, HUD said.